Electric utility

An electric utility is a company in the electric power industry (often a public utility) that engages in electricity generation and distribution of electricity for sale generally in a regulated market.[1] The electrical utility industry is a major provider of energy in most countries.

Electric utilities include investor owned, publicly owned, cooperatives, and nationalized entities. They may be engaged in all or only some aspects of the industry. Electricity markets are also considered electric utilities--these entities buy and sell electricity, acting as brokers, but usually do not own or operate generation, transmission, or distribution facilities. Utilities are regulated by local and national authorities.

Electric utilities are facing increasing demands [2] including aging infrastructure, reliability, and regulation.

Organization

Power transactions

An electric power system is a group of generation, transmission, distribution, communication, and other facilities that are physically connected.[3] The flow of electricity with the system is maintained and controlled by dispatch centers which can buy and sell electricity based on system requirements.

Executive compensation

The executive compensation received by the executives in utility companies often receives the most scrutiny in the review of operating expenses. Just as regulated utilities and their governing bodies struggle to maintain a balance between keeping consumer costs reasonable and being profitable enough to attract investors, they must also compete with private companies for talented executives and then be able to retain those executives.[4]

Regulated companies are less likely to use incentive-based remuneration in addition to base salaries. Executives in regulated electric utilities are less likely to be paid for their performance in bonuses or stock options.[5] They are less likely to approve compensation policies that include incentive-based pay.[6] The compensation for electric utility executives will be the lowest in regulated utilities that have an unfavorable regulatory environment. These companies have more political constraints than those in a favorable regulatory environment and are less likely to have a positive response to requests for rate increases.[7]

Just as increased constraints from regulation drive compensation down for executives in electric utilities, deregulation has been shown to increase remuneration. The need to encourage risk-taking behavior in seeking new investment opportunities while keeping costs under control requires deregulated companies to offer performance-based incentives to their executives. It has been found that increased compensation is also more likely to attract executives experienced in working in competitive environments.[8]

The Energy Policy Act of 1992 removed previous barriers to wholesale competition in the electric utility industry. Currently 24 states allow for deregulated electric utilities: Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Texas, Virginia, Arizona, Arkansas, California, Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Michigan, Montana, New Hampshire, New Jersey, New Mexico, New York, and Washington D.C.[9] As electric utility monopolies have been increasingly broken up into deregulated businesses, executive compensation has risen; particularly incentive compensation.[10]

See also

References

  1. ↑ "Electric". snavely-king.com. Snavely King Majoros & Associates. Retrieved 18 July 2014.
  2. ↑ By Candace Lombardi, CNET. “Utilities: Green tech good for planet, bad for business.” February 23, 2010.
  3. ↑ "Electricity Basics" (PDF). science.smith.edu. Smith College. Retrieved 18 July 2014.
  4. ↑ Joskow, Paul; Rose, Nancy; Wolfram, Catherine (1996). "Political Constraints on Executive Compensation: Evidence From the Electric Utility Industry". RAND Journal of Economics 27 (1): 165–182.
  5. ↑ Joskow, Paul; Rose, Nancy; Wolfram, Catherine (1996). "Political Constraints on Executive Compensation: Evidence From the Electric Utility Industry". RAND Journal of Economics 27 (1): 165–182.
  6. ↑ Joskow, Paul; Rose, Nancy; Wolfram, Catherine (1996). "Political Constraints on Executive Compensation: Evidence From the Electric Utility Industry". RAND Journal of Economics 27 (1): 165–182.
  7. ↑ Bryan, Stephen; Hwang, Leeseok (1997). "CEO Compensation In A Regulatory Environment: An Analysis Of The Electric Utility Industry". Journal of Accounting, Auditing & Finance 12 (3): 223–251.
  8. ↑ Bryan, Stephen; Lee-Seok, Hwang; Lilien, Steven (2005). "CEO Compensation After Deregulation: The Case Of Electric Utilities". Journal of Business 78 (5): 1709–1752.
  9. ↑ "Deregulated States". alliedpowerservices.com. Allied Power Services. Retrieved 18 July 2014.
  10. ↑ Arya, Avinash; Sun, Huey-Lian (2004). "Impact of Deregulation in CEO Compensation: The Case of Electric Utilities". American Business Review 22 (1): 27–33.
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